Networks Should Take
Note As Jerry DepartsAn encore Fool on the Hill
by Jim Surowiecki

In the normal course of events, last Friday's announcement that this will
be the last season of Seinfeld, the nation's most popular TV comedy,
would have led to the immediate pummeling of the company that depends on
Seinfeld for so much of its revenue. Instead, shares of General
Electric (NYSE: GE), which owns NBC, dropped a mere quarter of a point.
Nonetheless, the announcement did send shock waves through the network-television
establishment, and was taken by many as but the latest in a recent string
of batterings that once-mighty NBC, ABC, and CBS have taken at the hands
of recalcitrant production companies and bored viewers. The irony of this
so-called Media Age, after all, is that media companies are neither as large
nor as powerful as we imagine them to be, and profits are harder to come
by than all the hype about the information economy would suggest.

To take first things first, the reason the Seinfeld announcement had
a negligible impact on GE's stock price is that NBC, which is the most successful
of all the major networks, still accounts for just 5% of GE's revenue and
earnings. The sheer size of the profit machine Jack Welch has built is such
that NBC functions as a small, but important, division of the diversified
conglomerate. And while Seinfeld's disappearance will hardly be welcomed
by GE investors, especially given that the show generated $200 million in
operating profit for the network every year and allowed NBC to charge $500,000
for a 30-second ad spot, in the context of GE's overall company picture this
is but a small blip.

Imagine how different the market's reaction would have been had NBC been
an independent, publicly traded company, and you get some sense of how massive
GE -- with its market cap of $230 billion -- really is. And in a broader
sense, the episode should remind us of how small media companies are compared
to the U.S. economy as a whole. If you take all the major U.S. media
conglomerates, for instance, their annual sales come to just slightly less
than three-fourths of the annual sales of General Motors(NYSE: GM)
alone. In other words, most of the real work of the American economy has
nothing to do with the airwaves.

At the same time, Seinfeld's disappearance is important because it
represents yet another blow to the networks' quest for large-scale audiences.
Like E.R., Seinfeld has been one of the few programs that has
been able to draw large audiences consistently, and one of the few programs
that has been able to lure people back to network television. That's not
a minor feat at a time when the combined ratings for the four major networks
recently slipped below 50% of the TV-watching audience, and when CBS, NBC,
and ABC have watched their ratings slip by a third over the past decade.
Besides tearing a massive hole in the heart of NBC's Thursday night lineup
-- a hole that will become an abyss if NBC fails to win the bidding war for
E.R. -- Seinfeld's departure will also contribute to the further
fragmentation of the television audience, since whatever replaces it is unlikely
to achieve the iconic status Seinfeld now enjoys.

The news comes at a curious moment in NBC's history, when the network is
simultaneously enjoying record free cash flow of more than $1 billion and
confronting a future that could be very bleak. Unlike Fox, owned by News
Corp. (NYSE: NWS), and ABC, owned by Disney(NYSE: DIS), NBC has
missed the biggest opportunity for profits in the television business, namely
the syndication of monster hits. While Fox has turned The X-Files
and The Simpsons, both of which it owns, into cash cows through
syndication and merchandising, and while Disney has been able to produce
shows for ABC and use the network to promote its other businesses, NBC owns
none of its hit shows, and the shows it does own have been mediocre flops.
Since the middle of this decade, for the first time, the networks have been
able to be both producers and distributors of programming. But NBC has not
reaped the benefits of that transformation as others have.

Despite all the doom-saying, it remains true that the networks offer advertisers
a unique ability to reach massive numbers of viewers, which is why ad rates
have stayed stable and even risen as viewership has dropped. A recent article
in Fortune suggested that for the cost of one 30-second spot on the
CBS news program Public Eye, an advertiser could buy 18 spots on CNN
and actually reach a larger number of viewers. But, of course, running 18
different spots means that you're probably reaching many viewers more than
once, while running one spot ensures that you're reaching 10 million
different people. And only the networks can provide that kind of
guarantee.

Because of cross-ownership and the growing diversification of companies like
Disney and News Corp., let alone GE, it's difficult to separate out network
television and value it as a business. Still, TV is not going away, and the
networks seem to be beginning to think harder about how to leverage their
brand names and how to transform themselves into product platforms rather
than mere content distributors. For GE investors, the Seinfeld'
announcement may have meant very little, but for the networks as a whole,
it should be the latest in a long series of wake-up calls. Perhaps this time
the snooze button won't work.